It has been a very hectic week if you work on the floor at 11 Wall Street, and I do not envy you. Tuesday marked the second day of a selloff after the previous week’s G20 summit meeting truce was shattered by the arrest of Meng Wanzhou. Happening just before the weekend, this event is likely to be brushed aside, although messing with someone’s family is never a good idea. Considering how short of an attention span the MSM has, if mention of this event carries into next week I would be very surprised. Another factor which might help people forget this incident is the fact that while the market may be experiencing some turbulence, almost all other aspects of the economy are in very good shape.
The Washington Examiner reports that President Trump has secured another concession in his trade war, a reduction in tariffs on American-made cars. Because of the “trade war,” US cars sold in China were marked up an extra 40% due to duties and taxes. Now that barrier of entry may be reduced to 15%. Even though no concrete commitments have been made (a recurring theme with China), the faintest hint of softening restrictions is enough to cause a 3% + jump in GM and Ford stock. The companies which will see the most benefit are BMW and Mercedes which are owned by Europeans, but employ local workers in American factories. Earlier in the trade war, the EU had made some threats to shutter these factories as a response to the steel tariffs. Now those ambitions have all but evaporated. Boeing and Caterpillar were the big losers on Monday, but those, like most other stocks affected, are heavy industry blue chip companies that a selloff won’t permanently affect, sans a catastrophic world event. The only things China buys from us are high tech or durable goods, because they are incapable of making them themselves, so the demand for their products has not been diminished.
JP Morgan and Goldman Sachs have been making the rounds today trying to counter-signal any doomsayers who claim the “end is nigh.” Even though the stock market has erased all the gains it has made this year, usually a signal that a recession is incoming, the manufacturing index is 9 points above the danger zone, which indicates growth is continuing. This is the second market correction of 2018, and even though the yearly performance is expected to be the worst since 2009, surveys tabulate that most investors expect the S&P 500 to close at around three thousand points by the end of 2019, a 17% increase. Credited for continuing the run on corporate profits, expansion and growth are the tax cuts proposed by President Trump last year. Not only are the fat cats loosening their belts, but the average worker is also reaping the benefit of this booming economy. The average American worker has seen a roughly 2% increase in pay, the most since before the Great Recession. This isn’t a life-changing pay increase, but with a record number of job openings and a dearth of skilled labor companies are willing to fight for and pay talent.
I cannot be sure if an overzealous agent or a turn coat operative at the DOJ decided to request extradition of Ms. Meng but ultimately it doesn’t matter. These warrants exist to put pressure on those who would flaunt our laws or treaties, and are regularly left open for years at a time to work as a subtle reminder for the person in question. The arrest over the weekend has threatened to derail the shaky cease fire between Washington and Beijing, but I believe the worst is behind us and this news will probably fade into the background. If the Chinese were going to retaliate, then they would have done it immediately, because the point of countering would be to save the CEO’s daughter from having to see the inside of a cell, which hasn’t happened. Today a judge in China ruled in favor of a Qualcomm patent dispute over some iPhone models, and this is being described as revenge for Meng. A spokesman for Apple basically laughed it off. That is hardly a kill shot or pushes back against President Trump enough to have significant impacts on the talks. Regardless of the intent, this was a power move that caught them off guard. I’m not sure if arresting Ms. Meng was a smart move or not, however her incarceration is just another event which exposes how the Chinese have a very weak bargaining position.